A "no" vote in Italian referendum? First we had Brexit, then we had a Trump victory, and now we could be staring at a "no" vote in the Italian referendum over the weekend.

A "no" vote in Italian referendum?

First we had Brexit, then we had a Trump victory, and now we could be staring at a "no" vote in the Italian referendum over the weekend.

While the referendum is about constitutional changes (which could potentially strengthen the executive power via the change in the makeup of the Italian Senate from 315 elected senators to 100 appointed senators), it is widely touted as a vote of confidence in the Italian prime minister Matteo Renzi.

While the market appears to be much more prepared for any "undesirable" outcome this time, as compared with the shocking results of the Brexit vote in June and the US Presidential Election in Nov, we are mindful of a chain of events which could follow, shifting the market back to the "risk-off" mode again.

Matteo Renzi has pledged to quit if the referendum is lost. If this happens, firstly, a snap election may be on the cards (even though the next Italian general election is not due until May 2018). Assuming the anti-establishment sentiment (as seen in the Brexit vote and the US Presidential Election) is to prevail in Italy as well, there may be a shift in power to the main opposition party called the Five Star Movement led by Beppe Grillo - the charismatic former stand-up comedian who advocates a referendum on Italy's EU membership. Secondly, Renzi's current bailout plans for Italian banks may be derailed which may lead to a full-blown crisis in the Italian banking system, unleashing tremendous financial pressure on other European lenders, as well as the global financial system.

These could weigh further on the Malaysian equity market - but with limited/moderate impact as: (1) Its performance has already been battered by the continued fund outflows from emerging markets and the sustained volatility in emerging-market currencies, post the Trump victory; and (2) the foreign shareholding of Malaysian equity is low at only 23%.

For now, we maintain our end-2017 KLCI target of 1,745 pts - which we believe is more likely to be realised during 1H 2017 versus 2H 2017, assuming that the fund outflows from emerging markets and the depreciation of emerging-market currencies that will continue to buffet much of H1 2017, will have run their full course by the end of H1 2017.

Our end-2017 KLCI target of 1,745 pts is based on 17.5x 2017 earnings, which is at a 1x multiple premium to its 5-year historical average of about 16.5x. We believe the premium could be justified by: (1) a cyclical upturn in corporate earnings, as reflected in our projected +7.6% growth in FBM KLCI earnings (Exhibit 1), which are in turn underpinned by a stronger projected GDP growth of 4.5% in 2017 versus 4.2% in 2016; (2) the sustained accommodative monetary policy stance by the ECB and BOJ, and measured pace of rate hikes by the Fed.